Every day we hear news about cryptocurrency, bitcoins and ethereum in particular. But what is it? Is it a new kind of money or world’s financial affair? Thanks to this article, we will explore how cryptocurrency works and what it is used for.

First, cryptocurrency is just the most popular term we use. However, we can also hear digital currency, digital coin, digital money, virtual currency or cryptocoin. All these terms have a similar meaning – it is a digital currency whose transactions and unit creation are secured by cryptography. Bitcoin is the first cryptocurrency appeared in 2009 that was invented by an unknown developer or a group of developers named Satoshi Nakamoto. His (or theirs) aim was to create a decentralized digital cash system, using blockchain.

In order to create new coins – any cryptocurrency – you have to mine them. It means to solve mathematical puzzles using special hardware and software. If the special computers, called nodes, confirm your solution, you’ll get a reward – bitcoins.

How Does Cryptocurrency Work: Interesting Facts

how does cryptocurrency work

So, we have found out that cryptocurrency is an encrypted decentralized digital currency that is transferred between peers and confirmed in a public ledger via a process known as mining. Nevertheless, what does it all mean?
You need to know and understand several important things:

  • cryptocurrency exists on computers only: there is no paper or coin form for bitcoins, but you can exchange it for fiat money;
  • cryptocurrency is transferred between peers (there is no middleman like a bank);
  • transactions are recorded on a digital public ledger, which is encrypted using cryptography; each ledger is distributed to all nodes;
  • cryptocurrency is also decentralized, we mean it is controlled by users and a computer algorithm, not a central government;
  • bitcoin is one kind of many cryptocurrencies, other cryptocurrencies have such names as “Ethereum,” “Ripple,” and “Litecoin”; you can also meet another term, altcoin – it is a common name of the alternatives to bitcoin.

Some users compare cryptocurrency with electronic money or a bank debit card. You don’t need to understand how it works to use it. However, if you want to know everything, read one more explanation here.

how cryptocurrency works

For example, you need to send money from your card to another one, or you have to pay for some goods and services. To reach the goal it is possible to use a mobile app where you just fill in all the necessary information of your plastic card. Everything is different if you want to buy, sell or spend bitcoins or any other cryptocurrency. First of all, you’ll need a special wallet, where you can safely store your bitcoins. Then, if you are not a miner, you’ll have to exchange fiat currency for cryptocurrency. Use one of the web services or mobile apps to do that. Follow this step-by-step guide to complete the transaction:

  • create a ledger where all your payment will be stored; remember that the amount of the transactions is public, but the information about a sender and receiver is encrypted;
  • there are two types of keys, private and public, which allow to finish the transaction and update the ledger; store your private key in a safe place because only the owner of the private key can get an access to the money;
  • all transactions need to be confirmed by the nodes in the blockchain;
  • different services demand a different number of confirmations, usually three confirmation are needed;
  • the whole procedure usually takes up to ten minutes.

how does cryptocurrency work

Actually, as you can see, buying or selling bitcoins is not as difficult as it may seem. They say you need to do it once to understand the difference between using crypto and fiat currency. To learn more about how cryptocurrency works read this article.

The experts say that bitcoin is ‘too young’ to be sure that it will replace fiat currency, however, they admit that in a few years bitcoins as well as other altcoins will become even more popular. At this very moment IT giants, like IBM and Microsoft, start to invest in cryptocurrencies and blockchain technologies. Banks and governments realize that this invention has a big potential that may draw their control away. Cryptocurrencies are changing the world. Step by step. It is up to you, whether to stand beside and just observe or start making the history right now.